Trade barriers

Types of barriers Tariffs = a tax on imported goods Import quotas = a limit on the amount that can be imported Nontariff barriers (NTBs) = rules and regulations (e.g., health and safety) intended to make importing more difficult

Effect of tariffs A tariff will create a gap between the price paid by consumers in the importing country and the price received in the exporting country. The analysis is much simpler for a small country, which does not affect prices in other countries.

Equilibrium w/trade

Social surplus w/trade

A tariff If a tariff is imposed, it will be added to the price paid by importers. The supply curve will shift by the amount of the tariff. The result will be a decrease in domestic consumption, an increase in domestic production, and a decrease in imports.

Effect of a tariff

Effect on consumers, producers, government The higher price will hurt domestic consumers, so CS decreases The higher price will benefit domestic producers, so PS increases The tariff will benefit the government, so the government surplus increases (the solid black rectangle in the graph)

Effect on social surplus

Effect on society The gains to producers and the government is smaller than the loss to consumers, so society is worse off The total loss in social surplus equals the two small white triangles next to the black rectangle.

So why do it? Protect infant industries Promote national security Protect domestic workers Stop dumping Protect the environment Protect foreign workers from exploitation

Infant industries Pro: Protect firms in a new industry to allow them to expand and gain experience. When their costs per unit decreases the protection can be removed. Con: If the firms are protected as long as their costs are high, they have no incentive to become competitive.

National security Pro: The country needs large domestic supplies in case of war, which would disrupt imports. Con: All industries will argue that their product is vital to “national security.” Con: If we use up our domestic resources, they will not be available during a war.

Protect workers Pro: Domestic workers need protection from the unfair advantage to foreign competitors of cheaper labor. Con: If we restrict imports to protect some domestic workers, we will hurt workers in export industries and workers in industries that use the import as a resource.

Protect workers (cont.) Con: If other countries have an advantage due to abundant labor, we have an advantage due to abundant capital and arable land. Should they also restrict imports of capital-intensive goods and farm products from the US? We are both worse off!

Dumping Pro: Keep foreign producers from driving domestic producers out of business (by charging a price below cost) and then raising prices. Con: Domestic producers will often claim dumping when the price is below their cost, not below the cost in the exporting country.

Environment Pro: companies will produce in countries where environmental laws are weakest, causing more damage to the environment Con: the US has stricter laws because we can afford the higher cost; why should we require countries that are poorer to make the same sacrifice?

Environment (cont.) Con: we could have more impact on the environment by helping them reduce pollution rather than stop trading with them Con: if we help them develop, they will also be able to afford stricter environmental laws

Exploitation Pro: producers in some countries exploit their workers (“sweatshops”) to keep prices low Con: which is better for a worker, earning a low wage producing goods for export to the US, or having no job because we refuse to buy products from them?

Exploitation (cont.) Con: if US consumers really care about working conditions in other countries, they should stop buying products produced under such conditions, e.g., choose to buy “fair trade” coffee or shoes made in factories certified as paying a “living wage.”